Modeling the macroeconomic requirements of policy reforms

The model presented in this paper is in between RMSM-X and RMSM-XX in that, unlike RMSM-X, it does incorporate behavioural functions for the main macroeconomic variables, namely private consumption, private investment, money demand, demand for quasi money,export supply, and import demand. However, unlike RMSM-XX but like RMSM-X, it is solved recursively for residual variables. The user specifies"target values"for the real exchange rate, real interest rate, and the inflation rate. The model then determines the public sector behaviour consistent with attaining these targets. In an alternative solution, described in Appendix II, the model also permits setting exogenously the public sector variables and determining the private sector behaviour necessary to reach the policy targets. Finally, the model is generalized to take into account external financing constraints by making the real exchange rate exogenous. The model is then used to derive the macro adjustment required by trade and financial liberalization.